Introduction
Pennichuck Corporation is a non-operating holding company whose income is derived from the earnings of five wholly owned subsidiaries. We are engaged primarily in the collection, storage, treatment and distribution of potable water for domestic, industrial, commercial and fire protection service in New Hampshire through our three utility subsidiaries: Pennichuck Water Works, Inc. ("Pennichuck Water"), Pennichuck East Utility, Inc. ("Pennichuck East") and Pittsfield Aqueduct Company, Inc. ("Pittsfield Aqueduct"). Our water utility revenues constituted 91% of our consolidated revenues in 2008. Pennichuck Water, our principal subsidiary which was established in 1852, accounted for 71% of our 2008 consolidated revenues. Pennichuck Water's franchise area presently includes the City of Nashua, New Hampshire (the "City") and 10 surrounding municipalities.
Our water subsidiaries are regulated by the New Hampshire Public Utilities Commission (the "NHPUC") and must obtain NHPUC approval to increase their water rates to recover increases in operating expenses and to obtain the opportunity to earn a return on investments in plant and equipment. New Hampshire law provides that utilities are entitled to charge rates which permit them to earn a reasonable return on the cost of the property employed in serving their customers, less accrued depreciation, contributed capital and deferred income taxes ("Rate Base"). Capital expenditures associated with complying with federal and state water quality standards have historically been recognized and approved by the NHPUC for inclusion in water rates, though there can be no assurance that the NHPUC will approve future rate increases in a timely or sufficient manner to cover our capital expenditures.
The businesses of our two other subsidiaries are non-regulated water management services and real estate development and investment. Pennichuck Water Service Corporation ("Service Corporation") provides various non-regulated water-related monitoring, maintenance, testing and compliance reporting services for water systems for various towns, businesses and residential communities in and around southern and central New Hampshire and eastern Massachusetts. Its most significant contracts are with the Towns of Hudson and Wilton, New Hampshire and the Towns of Salisbury and Barnstable, Massachusetts.

The Southwood Corporation ("Southwood") is engaged in real estate management and commercialization activities. Historically, most of Southwood's activities have been conducted through real estate joint ventures. During the past 10 years, Southwood has participated in four residential real estate joint ventures and four commercial real estate joint ventures with John P. Stabile II, ("Stabile") a local developer. Southwood's earnings and gains have from time to time during that period contributed a significant percentage of our consolidated net income, and have increased the fluctuations in our net income during that period. While we expect to pursue the orderly commercialization of our remaining approximately 450 acres of undeveloped non-utility land over the next several years as an element of our overall business strategy, we expect generally that Southwood will contribute a smaller proportion of our consolidated revenues and earnings in the future.
As you read Management's Discussion and Analysis, refer to our Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements in Item 8 in this Annual Report on Form10-K Report. Forward-Looking Statements
Certain statements in this Management's Discussion and Analysis are forward-looking statements intended to qualify for safe harbors from liability under the Private Securities Litigation Reform Act of 1995, as amended (and codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). The statements are made based upon, among other things, our current assumptions, expectations and beliefs concerning future developments and their potential effect on us. These forward-looking statements involve risks, uncertainties and other factors, many of which are outside our control which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. In some cases you can identify forward-looking statements where statements are preceded by, followed by, or include the words "in the future," "believes," "expects," "anticipates," "plans" or similar expressions, or the negative thereof. Forward-looking statements involve risks and uncertainties, and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors include, among other things, the timing and results of possible eminent domain settlement discussions with the City of Nashua, the timing and results of a rehearing before the NHPUC regarding its eminent domain order (the "Eminent Domain Order") in favor of the City, the timing and results of a possible appeal to the New Hampshire Supreme Court regarding the Eminent Domain Order, the impact of an eminent domain taking by the City on business operations and net assets, the success of applications for rate relief, changes in governmental regulations, changes in the economic and business environment that may impact demand for our water and real estate products, changes in capital requirements that may affect our level of capital expenditures, changes in business strategy or plans and fluctuations in weather conditions that impact water consumption. These risks and others are described elsewhere in this Annual Report on Form 10-K, including particularly under Part I, Item 1A, "Risk Factors." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Events Significantly Affecting Our Earnings During Recent Years Overview
Our earnings during the five-year period ended December 31, 2008 were significantly affected by the following events that occurred during one or more years in that period:
• Sale of land and building owned by HECOPs I, II and III in January 2008;

• Sale of one cell tower lease in 2006 and eight cell tower leases in 2007;

• Increased recorded amounts of AFUDC as a result of the ongoing upgrade of our water treatment plant;

• Costs associated with our actions to oppose ongoing efforts by the City of Nashua to acquire all or a significant portion of the assets of Pennichuck Water through an eminent domain proceeding under New Hampshire utility law;

• Defense and settlement costs related to parallel investigations by the U.S. Securities and Exchange Commission (the "SEC") and the New Hampshire Bureau of Securities Regulation (the "Bureau") that were conducted primarily in 2003 and settled in December 2004; and

• Sales of land by Southwood, which were especially significant in 2004.

Southwood Real Estate-Related Revenues
Our revenues and earnings were positively affected by sales of Southwood land
during two of the past five years. The following table sets forth the amount of
revenues that we recognized during each year in the 2004 to 2008 period
attributable to those land sales and the percentage that those revenues
represented of our total revenues during each of those years.

                                                      % of
                                   Southwood      Consolidated
                       Year       Land Sales        Revenues
                                    (000's)
                       2004       $     1,224               5.3 %
                       2005                 -               0.0 %
                       2006                35               0.1 %
                       2007                 -               0.0 %
                       2008 (a)             -               0.0 %

(a) Excludes the January 2008 sale of three commercial real estate properties that comprised substantially all of the assets of HECOP I, II and III as more fully described in Note 4, "Equity Investments in Unconsolidated Companies" in

While we expect to pursue the orderly commercialization of approximately 450 acres that comprise our remaining undeveloped non-utility land over the next several years as an element of our overall business strategy, we expect that Southwood's revenues from land sales will constitute a relatively minor percentage of our consolidated revenues in the future.

City of Nashua's Ongoing Eminent Domain Proceeding The City of Nashua, New Hampshire (the "City") is engaged in an ongoing effort that began in 2002 to acquire all or a significant portion of the assets of Pennichuck Water, our largest utility subsidiary, through an eminent domain proceeding under New Hampshire Revised Statutes Annotated ("NHRSA") Chapter 38. See Part I, Item 1, "Business" and Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K for a discussion of the background of the proceeding, the issues and uncertainties associated with the proceeding and the possible outcomes of the proceeding which discussions are incorporated herein by reference. We are opposed to the City's proposed eminent domain taking of Pennichuck Water assets.
Our annual eminent domain-related expenses in 2004 through 2008 were $1.2 million, $2.4 million, $2.4 million, $0.9 million and $0.2 million, respectively.
Critical Accounting Policies, Significant Estimates and Judgments We have identified the accounting policies below as those policies critical to our business operations and the understanding of the results of operations. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Changes in the estimates or other judgments included within these accounting policies could result in significant changes to the consolidated financial statements. Our critical accounting policies are as follows. Regulatory Accounting
The use of regulatory assets and liabilities as permitted by Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation" stipulates generally accepted accounting principles for companies whose rates are established by or are subject to approval by an independent third-party regulator such as the NHPUC. In accordance with SFAS No. 71, we defer costs and credits on the consolidated balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate-making process in a period different from when the costs and credits are incurred. These deferred amounts, both assets and liabilities, are then recognized in the consolidated statements of income in the same period that they are reflected in rates charged to our water utilities' customers. In the event that the inclusion in the rate-making process is disallowed, the associated regulatory asset or liability would be adjusted to reflect the change in our assessment or change in regulatory approval. We did not defer the costs associated with our defense against the City's ongoing eminent domain proceeding.

Revenue Recognition
The revenues of our water utility subsidiaries are based on authorized rates approved by the NHPUC. Estimates of water utility revenues for water delivered to customers but not yet billed are accrued at the end of each accounting period. We read our customer meters on a monthly basis and record revenues based on meter reading results. Unbilled revenues from the last meter-reading date to the end of the accounting period are estimated based on historical usage and the effective water rates. Actual results could differ from those estimates. Accrued unbilled revenues recorded in the accompanying consolidated financial statements as of December 31, 2008 and 2007 were approximately $2.9 million and $2.4 million, respectively.
Our non-utility revenues are recognized when services are rendered. Revenues are based, for the most part, on long-term contractual rates. Pension and Other Post-retirement Benefits Our pension and other post-retirement benefits costs are dependent upon several factors and assumptions, such as employee demographics, plan design, the level of cash contributions made to the plans, earnings on the plans' assets, the discount rate, the expected long-term rate of return on the plans' assets and health care cost trends.
In accordance with SFAS No. 87, "Employers Accounting for Pensions" and SFAS No. 106, "Employers Accounting for Post-retirement Benefits Other than Pensions", changes in pension and post-retirement benefit obligations other than pensions ("PBOP") associated with these factors may not be immediately recognized as pension and PBOP costs in the consolidated statements of income, but generally are recognized in future years over the remaining average service period of the plans' participants.
In determining pension obligation and expense amounts, the factors and assumptions described above may change from period to period and such changes could result in material changes to recorded pension and PBOP costs and funding requirements. Further, the value of our pension plan assets are subject to fluctuations in market returns which may result in increased or decreased pension expense in future periods.
Although our pension plan currently meets the minimum funding requirements of the Employee Retirement Income Security Act of 1974, market declines significantly impacted the value of our pension plan assets in 2008 which we expect will unfavorably impact pension expense in 2009. Accordingly, we currently anticipate that we will contribute approximately $1.0 million to the plan during 2009 as compared to $836,000 in 2008.

Results of Operations-General
In this section, we discuss our 2008, 2007 and 2006 results of operations and the factors affecting them. Our operating activities, as discussed in greater detail in Note 10 to the Notes to Consolidated Financial Statements, are grouped into three reportable business segments as follows:
• Water utility operations;

• Water management services;

• Real estate operations; and

• Other

Our consolidated revenues tend to be significantly affected by weather conditions experienced throughout the year and, from time to time, by final orders of the NHPUC on our requests for rate increases. Water revenues are typically at their lowest point during the first and fourth quarters of the calendar year. Water revenues in the second and third quarters tend to be greater because of increased water consumption for nonessential usage by our customers during the late spring and summer months. Results of Operations-2008 Compared to 2007 Overview
For the year ended December 31, 2008, our consolidated net income was $4.7 million, compared to net income of $3.6 million for the year ended December 31, 2007. On a per share basis, fully diluted income per share for 2008 was $1.11 as compared to $0.84 per share for 2007. The principal factors that affected current year net income, relative to prior year net income, are the following:
• Rate relief granted by the NHPUC to all three of our regulated water utilities;

• Record rainfall levels in southern New Hampshire during the third quarter of 2008 which substantially reduced demand for our Company's water, and therefore water utility revenues, during what is typically the highest demand quarter in the year;

• A 2008 non-operating after-tax gain of approximately $2.3 million ($3.4 million before federal income tax) from the sale of land and three commercial office buildings by three of our four HECOP joint ventures;

• A 2007 non-operating gain of $1.2 million (pre-tax) from the sale of eight cell tower leases;

• An increase in 2008 regulated water utility operating expenses of approximately $1.7 million;

• An increase in 2008 interest expense of $774,000;

• A reduction in 2008 eminent domain-related costs of $680,000 (2007 costs were net of a $250,000 cash payment from the City of Nashua); and

• An increase in the 2008 provision for income taxes of $432,000.

Water Utility Operations
Our water utility operations include the activities of Pennichuck Water,
Pennichuck East and Pittsfield Aqueduct, each of which is regulated by the
NHPUC. On a combined basis, operating income of our three utilities for the year
ended December 31, 2008 was $7.1 million, a decrease of $646,000 from 2007.
Our water utility operating revenues increased to approximately $28.3 million in
2008, or 4.0% from 2007, as shown in the following table.

                                               Year Ended December 31,
                                       2008                   2007            Change
                                                       (000's)
             Pennichuck Water   $ 22,097        78 %   $ 21,780        80 %   $   317
             Pennichuck East       5,088        18 %      4,654        17 %       434
             Pittsfield            1,118         4 %        783         3 %       335

             Total              $ 28,303       100 %   $ 27,217       100 %   $ 1,086

Water utility operating revenues increased by $1.1 million due principally to the application of higher water rates granted by the NHPUC to all three of the Company's utilities (Pennichuck Water, Pennichuck East and Pittsfield Aqueduct) to substantially reduced water usage volumes resulting from record rainfall levels in the third quarter of 2008. Recorded rainfall in the third quarter of 2008, as reported to the National Weather Service from our Nashua water treatment plant, set an all time record of 25 inches compared to the prior record of 20 inches in 1991 and the long term average of 10 inches for the same period. In addition, the record rainfall was spread relatively evenly over each of the three months in the third quarter, further impacting customers' summer irrigation and other outdoor usage during that quarter and into the fourth quarter of 2008. See Part I, Item 1, "Regulation" in this Annual Report on Form 10-K for a discussion of 2008 rate matters.
For the year ended December 31, 2008, approximately 21% of our water utility operating revenues were derived from commercial and industrial customers, approximately 66% from residential customers, with the balance being derived from fire protection and other billings to municipalities, principally the City of Nashua and the towns of Amherst, Merrimack and Milford, New Hampshire. We believe that due to the combined effects of the current economic slowdown, changing demographics and conservation measures, water consumption from existing customers has generally been declining. We also believe that further consumption decline may result from increased customer conservation efforts as a result of current and future rate increases and the recently completed implementation of monthly billing which replaced quarterly billing for all our customers.

For the year ended December 31, 2008, utility operating expenses increased by approximately $1.7 million, or approximately 8.9%, to approximately $21.2 million as shown in the table below.

                                                 Year Ended December 31,
                                              2008         2007       Change
                                                         (000's)
            Operations & maintenance        $ 14,312     $ 13,608     $   704
            Depreciation & amortization        3,990        3,468         522
            Taxes other than income taxes      2,867        2,361         506

            Total                           $ 21,169     $ 19,437     $ 1,732

The change in our utilities' operating expenses over the same period in 2007 was primarily the result of the following:
• Increased depreciation and amortization expense totaling $522,000 and increased property taxes of $506,000 principally due to the completed portions of the water treatment plant upgrade for Pennichuck Water;

• $372,000 of increased production costs largely related to increased fuel, power and purification costs;

• $161,000 of increased transmission and distribution costs relating to repair or replacement of gates, mains, meters and hydrants, supplies, fuel and labor costs; and

• $125,000 of increased general and administrative costs primarily relating to higher costs for employee benefits and property and casualty insurance, offset in part by a reduction in accrued bonuses resulting from operating performance variations between the comparable periods.

As a result of the above changes in operating revenue and operating expenses, water utility operating income declined by $646,000 or 8.3% to $7.1 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. Water Management Services
The following table provides a breakdown of revenues from our non-regulated water service business for the years ended December 31, 2008 and 2007.

                                                            Year Ended December 31,
                                                     2008             2007           Change
                                                                    (000's)
Municipal contracts (base fees under
contracts)                                        $    1,173       $    1,083      $       90
Municipal contracts (additional to base scope
of contracts)                                            623              390             233
Community system contracts                               335              368             (33 )
WaterTight and other                                     516              446              70

Total                                             $    2,647       $    2,287      $      360

Municipal base contract fees increased by $90,000 primarily due to annual adjustments to the base fees charged to existing customers as a result of CPI indexed increases provided for in our contracts. The increase in additional contract work of $233,000 was due principally to major projects undertaken for our Salisbury, MA customer, extra work performed for customers to repair and restore facilities as a result of a major December 2008 ice storm, and an increase in compliance work for some of our small systems customers (i.e. arsenic removal systems and other treatment improvements). Watertight and other income increased by $70,000 principally due to a $42,000 increase in contract testing programs.
For the year ended December 31, 2008, total operating expenses associated with our non-regulated water service business increased $180,000 from 2007. Maintenance costs for servicing our various operating contracts increased by $274,000. The increase in maintenance expense was partially offset by a decrease in the amount of professional, marketing and general and administrative expenses of $50,000 and a decrease of $56,000 for bad debt expense.
As a result, operating income related to the water service business increased 92% to $375,000 for the year ended December 31, 2008. Real Estate Operations
As of December 31, 2008 and 2007, the Company, principally through its Southwood subsidiary, owned approximately 450 acres of non-utility undeveloped land in southern New Hampshire. As of December 31, 2008, Southwood also held a 50% ownership interest in one real estate joint venture organized as a limited liability company. As of December 31, 2007, Southwood held a 50% ownership interest in four real estate joint ventures organized as a limited liability companies.
The Company expects to pursue the commercialization of 450 acres of non-utility undeveloped land in southern New Hampshire, over the next several years as market conditions improve.
For the year ended December 31, 2008, Southwood's equity share of pre-tax earnings from the four real estate joint ventures (HECOP I, II III and IV) was approximately $3.4 million, compared to $60,000 for the year ended December 31, 2007. The increase in the joint ventures pre-tax earnings was due principally to an approximately $3.4 million gain (before federal income tax) from the January 2008 sale of the three commercial real estate properties owned by three of the four joint ventures. In December 2008, the three joint ventures that held these properties (HECOP I, II and III) were dissolved.
The real estate assets sold by three of the four joint ventures comprised substantially all of the assets of those three joint ventures. The fourth joint venture currently owns undeveloped land and generates no revenue. Consequently, earnings or losses from these joint ventures for the foreseeable future are expected to be insignificant.
Expenses associated with our real estate operations were $59,000 and $296,000 for the year ended December 31, 2008 and 2007, respectively. The decrease of $237,000 was attributable to a decrease in salaries and benefits of approximately $177,000 and a decrease in the intercompany management fee of $47,000.
Eminent Domain Expenses, Net
Our eminent domain expenses were $217,000 for the year ended December 31, 2008 as compared to $897,000 for the year ended December 31, 2007. The 2008 eminent domain expenses were primarily attributable to reviewing and analyzing the NHPUC's July 25, 2008 eminent domain order and preparing our motion for rehearing filed in August 2008. The amount for the year ended December 31, 2007 is net of a $250,000 cash payment received from the City of Nashua pursuant to an agreement with the City to suspend the eminent domain hearings. The 2007 eminent domain expenses were primarily attributable to expenses incurred in preparing for and conducting the merits hearing, and to a lesser extent, expenses related to settlement discussions.

Other (Expense) Income, Net
Other (expense) income, net for the year ended December 31, 2008 was $(110,000) as compared to $1.3 million for the year ended December 31, 2007. Included in other income in 2007 is a gain on the sale of eight cell tower leases in the . . .